8 fund forecasts for 2013

Commentary: An ETF price war and other predictions for the new year

Legendary economist John Kenneth Galbraith once said that the only function of economic forecasting “is to make astrology look respectable.”

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Thankfully, I don’t forecast the economy, only the mutual fund business for the year ahead. In more than 15 years of doing this at the start of each year, I typically have gotten about three-fourths of my forecasts right, which I would like to think is at least a bit more reliable than star-gazing.

In rooting around the fund industry doing my job, I have come up with eight big stories that I think will dominate the fund world in the year ahead. They won’t dominate the news or the economy the way the fiscal cliff has in recent weeks, but they will set the tone for how investors are feeling about funds 12 months from now.

Fund industry headlines in 2013 will include:

1. A massive move by some big names into ETFs.

One oddity in the evolution of exchange-traded funds is that Vanguard effectively has been the only fund firm allowed to create an ETF share class for its traditional funds (Vanguard actually has a patent on the process, which expires in 2019).

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Other big players, however, have approached the U.S. Securities & Exchange Commission about allowing for a “hub-and-spoke system,” where ETF versions of traditional mutual funds could be created as an extension of the existing issue. In short, it’s different from what Vanguard does mostly in semantics, but that should be enough.

Assuming the SEC approves the plan, expect Fidelity and State Street to jump in hard, and for firms like T. Rowe Price and others to follow suit. In short, the ETF landscape will look a lot more like the traditional fund world in terms of who the big players are.

2. Active mutual funds being converted into ETFs.

I expect a continuation of ETF expansion, this time with companies overcoming the hurdles the SEC has put in front of actively managed funds that wanted to change structures to become ETFs.

There already are active ETFs, but the expected boom in this segment of the business has not occurred, in part because regulators have not approved these conversions. That said, it looks like a few fund sponsors may be able to jump the hurdles and get conversions done this year; once that happens, it will be a race between the conversions and the hub-and-spoke expanders to get their issues to market.

3. New ETFs igniting a price war.

When the first two items here occur, the effect will not only be fun, but good for investors.

Consider the pricing structure on Bill Gross’s ETF version of PIMCO Total Return
BOND, +0.24%
; it’s cheaper than his retail fund, but not quite as inexpensive as institutional share classes, due to underlying expenses inherent in traditional funds.

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